Environment Secretary Michael Gove has hit out at water companies over their use of “tax havens and excessive profits”.

In a letter to Jonson Cox, Chairman of water regulator Ofwat, Mr Gove warned concerns about water companies’ behaviour “will only deepen” if dry weather experienced in the autumn results in some firms introducing hosepipe bans during the summer.

Mr Gove added: “The use by some water companies of opaque financial structures based in tax havens and high gearing is deeply concerning. I also share your concern that some water companies have for many years been making excessive profits.

He offered to provide Ofwat with the necessary powers to tackle these behaviours and consider what changes could be made.

In response, Mr Cox said the regulator has been working to ensure all companies serve customers’ long term interests.

He added the forthcoming price review will require water firms to demonstrate their plans are “financially resilient now and over the long term”.

He stated in a letter to Mr Gove: “We are pushing companies on a number of fronts, including engaging intensively with the most highly leveraged companies. Starting with our public action in respect of Thames Water last year, I have called on companies which have taken on aggressive financial structures, to demonstrate that they are on a sustainable financial footing.

“We are also increasing expectations on companies’ corporate governance arrangements and increasing transparency on company returns, with companies to publish a comparison of their actual returns to investors and what those returns would be under the structure we use in setting customers’ prices. Highly leveraged companies will have to explain to their customers how the higher returns from their regulated companies look fair.”

Ofwat will update Defra on its progress and next steps by early April.